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Executives

Alexander Smith - Chief Executive Officer, President, Director and Member of Executive Committee

Charles Turner - Chief Financial Officer, Executive Vice President of Finance and Treasurer

Kelley Buchhorn -

Analysts

Alan Rifkin

Thomas McConville

Simeon Gutman - Crédit Suisse AG

Bradley Thomas - KeyBanc Capital Markets Inc.

Anthony Chukumba - BB&T Capital Markets

Brian Nagel - Oppenheimer & Co. Inc.

Pier 1 Imports (PIR) Q1 2012 Earnings Call June 16, 2011 11:00 AM ET

Operator

Good morning, ladies and gentlemen. This is the Pier 1 Imports quarterly conference call. At the request of Pier 1 Imports, today's conference call is being recorded. [Operator Instructions] I would now like to introduce Mr. Alex Smith, President and Chief Executive Officer for Pier 1 Imports. Mr. Smith, you may begin.

Alexander Smith

Thank you, Sarah. Good morning, everyone, and thanks for joining us today. Cary Turner, our Executive Vice President and Chief Financial Officer, is with me today; as is Kelley Buchhorn, our Director of Investor Relations. As always, before we begin I will ask Kelley to read you the Safe Harbor Statement. Kelley?

Kelley Buchhorn

Thank you, Alex, and good morning, everyone. Prior to market open today, we issued a press release which included the detailed financial results for the first quarter ended May 28, 2011. In just a few moments, we will hear comments from Alex and Cary about those results, followed by a brief question-and-answer period.

Before we begin, I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases. Our actual results and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings, including our Annual Report on Form 10-K, for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

If you do not have a copy of today's press release, you may obtain one, along with copies of prior press releases and all SEC filings, by linking through to the Investor Relations page of our website, pier1.com.

I would now like to turn the call over to Cary, who will provide the highlights and an overview of our first quarter financial results. Cary?

Charles Turner

Thank you, Kelley. As reported in this morning's press release, increases in store traffic, conversion rate and average ticket were the key drivers contributing to our top line sales growth for the quarter. Total sales increased 9.3% for the quarter over the same period last year, and comp-store sales increased 10.2% for the quarter, on top of last year's 14.3% increase for the same period.

On a trailing 12-month basis, sales per retail square foot were $171 for the quarter, up from $155 per retail square foot at the end of the first quarter of last year.

Merchandise margins are at a historical high and, for the quarter, increased 120 basis points as a percentage of sales to 59.8% of sales compared to 58.6% of sales in the first quarter of last year. Merchandise margins continue to be positively impacted by strong input margins, controlled supply-chain costs and well-managed inventory levels.

Store occupancy costs for the first quarter were $65.9 million or 19.7% of sales, a decline of 160 basis points as a percentage of sales from last year. Rent expense was relatively flat, and repairs and maintenance costs and utilities increased slightly over last year's first quarter.

Gross profit for the quarter improved 270 basis points to 40.1% of sales compared to 37.4% of sales last year.

SG&A expenses were leveraged and decreased 40 basis points as a percentage of sales compared to the first quarter last year. As you can see in the SG&A table detailed in today's press release, both variable and relatively fixed SG&A costs were leveraged. We continue to effectively manage our expenses with the ongoing needs of the business.

Operating income for the first quarter improved to $19.9 million or 5.9% of sales compared to last year's first quarter operating income of $8.3 million or 2.7% of sales. Sales and merchandise margin increases, coupled with the company's ability to leverage expenses, resulted in the improvement in operating income.

The company's net operating loss federal tax carryforward was fully utilized by the end of last year. The company's effective tax rate in the first quarter of this year was 35%, and going forward for the remainder of the year, the effective tax rate will be in a range of 35% to 37%.

Earnings per share for the first quarter of this year was $0.12 per share compared to $0.07 per share last year.

Inventory at the end of the first quarter was $315.1 million, up 3.9% over the end of the first quarter last year. Management continues to strategically manage its inventory purchases and monitor its inventory levels to keep them in line with consumer demand.

Cash and cash equivalents were $304 million at the end of the first quarter, a $99.2 million increase over last year's balance of $204.8 million for the same period and up slightly from the end of last year.

Our 3-year growth plan, which we detailed in April, includes investing in initiatives to drive sales and further improve profitability. During the first quarter, capital expenditures were $8.4 million. Approximately half of this amount was invested in our existing stores, targeted toward the initial rollout of new merchandise fixtures. The return on these investments have shown positive results, with sales increases achieved in those stores with the new fixtures trending above the company average. The remaining half of the capital spend during the quarter was directed primarily in technology, projects and infrastructure.

We also announced, in April, the board-approved $100 million initial share-repurchase program. During the quarter, we repurchased 264,000 shares of our common stock for $3.1 million. Since the end of the quarter, we have repurchased an additional 952,000 shares of our common stock for $10.7 million. To date, we have repurchased approximately 1.2 million shares at a weighted average cost of $11.37 and a total cost of approximately $13.8 million. $86 million remains available for repurchase under the plan.

During the first quarter, we closed 2 stores and ended the quarter at 1,044 Pier 1 Import stores, with 965 stores in the U.S. and 79 stores in Canada, totaling 8.2 million retail square feet. For the year, we plan to open approximately 12 stores and close 7, for a net of 5 store openings.

We have a few updates to provide today on both the second quarter and fiscal year. Total sales for the second quarter will be approximately the same as comp-store sales. For the second quarter, merchandise margins as a percentage of sales will be somewhat higher than last year's second quarter merchandise margins and will be approximately 59% of sales.

Occupancy costs for the second quarter will increase slightly over last year. Second quarter variable expenses will be leveraged as a percent of sales, except for marketing expenses, which will be approximately $3 million to $4 million higher than in the second quarter last year. Alex will discuss marketing in more detail shortly.

For the full year, total sales will be approximately 1% higher than comp-store sales, primarily due to the planned increase in store count later this year compared to last year. Merchandise margins for the year as a percent of sales will be slightly above last year's levels.

Occupancy costs for the year will be slightly higher than last year by approximately $3 million. Fixed expenses for the year will be approximately $2 million higher in each quarter, while variable expenses will increase at a rate equal to 1/2 of the comparable-store sales gain.

For the year, total SG&A expenses will increase somewhat, but as a percentage of sales, will continue to be leveraged as total sales increase.

Cash flow generated from operations will be used, in part, to fund capital expenditures this year of approximately $50 million to $60 million, which is part of the company's 3-year growth plan initiatives. Therefore, depreciation will increase slightly above last year.

The company's effective tax rate for the year, as I said earlier, will be in a range of 35% to 37% of pretax income.

And finally, inventory levels at the end of fiscal 2012 will be at or near inventory levels at the end of last year.

Now I'd like to turn it back over to Al.

Alexander Smith

Thanks, Cary. Our first quarter results were very strong. The creativity and rigor embedded in our organization continues to serve us well. Our business is both strong and sustainable. Our marketing is doing a good job at driving new and loyal customers to our stores, where they are responding positively to our evolving and improving merchandise assortments and our friendly and efficient sales associates.

Our strong merchandise margins are benefiting from good cost control and the right mix of promotional activity. Expenses are carefully and prudently managed and are being leveraged to sales increase. We are generating cash and investing in our business and our future.

Our second quarter sales continue to be sound, and our merchandise margin remains strong, which prompts 2 questions: Can we maintain our margin rates? And could it go even higher? I've talked before about how we've extremely good control over each component of our merchandise margin. And we see nothing on the horizon which will put our margin under undue pressure. Our merchants have coped extremely well with the cost increases. Our clearance markdowns continue to fall as a percentage of sales. Our supply-chain costs are in great shape.

What this means is that our merchandise margin is most impacted by the amount of limited-time offer activity that we have in our business, or in other words, promotional sales. We are constantly balancing our limited-time offer activity to give us a mix of sales and margin rate that maximizes merchandise margin dollars. As you know, we always focus on margin dollars.

In this fragile economy, we anticipate that the current level of promotional activity will be needed to keep sales at the level we want to maximize merchandise margin dollars. However, when the economy finally becomes more robust and less promotional activity is needed to drive sales, there is nothing to stop merchandise margins from rising further.

We've increased our investment in market research over the last couple of years. Understanding the needs and attitudes of our customers and potential customers is important to us on many levels. It helps us to refine our creative and media strategies, build our assortments and finesse our customer service. We want to ensure that we are speaking to our customers at the time and way she prefers, and we know she likes TV.

We are very pleased with our national cable and radio campaigns last year, and we ran both cable and radio again during the first quarter this year. Once more, we were pleased with the results and have, therefore, decided to make an additional investment in TV and radio during the second quarter. As Cary mentioned, marketing expenses will therefore slightly increase by $3 million to $4 million in the second quarter over last year, and the benefit of this investment may not be fully leveraged until the third and fourth quarters.

During our conference call in April, we discussed in great detail our 3-year growth plan designed to drive sales, increase profitability and maximize shareholder value. This plan calls for our evolution into a multichannel best-in-class retailer, thus extending the reach of the Pier 1 Imports brand.

We are very focused on the execution of this plan. And we are pleased to announce that the soft launch of Pier 1 To-Go nationally last week, after a successful regional test -- we will begin actively marketing Pier 1 To-Go next week.

As expected, our preliminary data shows us that the average ticket and units per transaction for orders placed online are higher than the company average. Our preliminary data also shows, once the customer comes into the store to pick up and pay for their Pier 1 To-Go selections, they are adding additional items to their basket, which tells us there is significant upsell potential once the customer is in our stores.

Our plans are progressing nicely towards creating an e-commerce-enabled website, and plans to launch this initiative are on track for summer 2012. Of course, adding the cards, we will call it Pier 1 To-You, is hugely important. But of equal importance is ensuring that the new pier1.com does an even better job than the current pier1.com at creating an online experience that strengthens our relationship with our customers by fully reflecting our brand and influencing both online and in-store shopping.

Our 3-year growth plan calls for investment in our stores, both existing stores and the expansion of our store base. And as Cary mentioned earlier, we have started the rollout of the new merchandise fixtures and floor sets planned for this year. By mid-summer this year, nearly every store will receive a subset of the new fixtures. These new fixtures and floor sets not only allow for a consistent look across our chain, but results from our test stores have been positive, with sales and productivity above the company average.

Also this year, a select group of stores with higher sales potential will receive the full, complete set of new fixtures along with an enhanced lighting package and a general facility facelift, which we've previously discussed.

And finally, we plan to fully remodel 5 locations this year. These stores will be closed during the construction period and will reopen with our new prototype. Our first remodeled store, located at 15th and 5th in Manhattan, closed right after Memorial Day and is anticipated to reopen in September. We are very excited about this remodel as it is the start of our relaunch in the New York metro market.

Many good opportunities exist for store expansion in Manhattan and the boroughs. And as a start, we plan to open 2 new locations, one in Queens and one in the Bronx, this fiscal year. In total, we plan to open 12 new stores this year, and all of our new stores, going forward, will of course be built to the new prototype.

Our investments in technology and infrastructure, other than the new pier1.com, are also well underway. For example, we completed the rollout of cash-stand computer kiosks to all our stores this quarter, with great reviews from associates and customers alike. We have also kicked off our new point-of-sale projects and the evaluation process has begun.

Lastly but by no means least, the initial $100 million share repurchase program is underway. Market conditions have been such that we've been able to repurchase shares in recent weeks. Obviously, our plans are continue -- I'd love to continue as long as we can optimize our repurchases and return value to our shareholders.

So here we are, 3 months into our 3-year plan, with progress on all fronts. We are feeling good. Our entire organization is committed to the successful, flawless execution of our 3-year growth plan. The invested -- investments we make will continue to build strength and sustainability into the future of our business. Our evolution into a best-in-class multichannel retailer gets stronger every day. Our competitive position is improving, and we are gaining market share.

Thank you for listening to us today and for your continued interest in Pier 1 Imports. We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer.

Brian Nagel - Oppenheimer & Co. Inc.

So first question I want to ask, just about sales trends. Obviously, we saw, in aggregate, your very strong comps for the first quarter. A lot of concern in the market right now about the consumer and some of these issues such as gas prices. So with that, 2 questions. I mean, did you see any -- would you outsize variability throughout the quarter in sales? And then maybe a comment on how sales are tracking, even though I know it's early in Q2 so far.

Alexander Smith

No, I -- There wasn't huge amounts of variation in the first month. It was, obviously, a bit, a little bit. What I'd say we see in the sales patterns, I think this is a continuation of what we saw last year, and we've talked about it. The customer certainly comes out for the high days and holidays. So for example, we had a really strong Easter and then this kind of a little lull after Easter, and then it builds back again. We had a really strong Memorial weekend, and then it kind of fell back a little bit, and then builds up again. We're going to -- we're seeing the same this day, towards Father's Day. So I think the softness that you allude to sort of manifests itself in a little bit of sort of buyer's remorse after a big holiday weekend. And I think, if you look back in time, what we used to see is, after a holiday weekend, the momentum continued really strongly into the following week and kind of kept going. We certainly don't see that much. But I want to emphasize -- I mean, that was very much the pattern last year as well, and we continue to see that.

Brian Nagel - Oppenheimer & Co. Inc.

And then, Alex, anything on sales here, so far in Q? I mean, recognizing would you said, there really hasn't been much of a holiday yet in Q2, but any comment on sales so far?

Alexander Smith

Well, not really. It's sort of only 7 -- 17 days in, but I think, as we said in the prepared remarks, we're feeling sales are very sound, and we think merchandise margins are very strong. And we're pretty confident about the future. What can I tell you?

Brian Nagel - Oppenheimer & Co. Inc.

It sounds good. Then the next question, on margins. I mean, Cary, it looks like, from the commentary you made -- the comments you made in your prepared comments around margins, it sounds like you're upping your margin targets for the year a bit. Obviously, we saw a very strong merchandise margin in Q1. Is it more -- as you look towards now, your full year targets, is it more of just a continuation of what we're seeing? Or is there some -- any particular pieces that are improving more than others?

Charles Turner

No, it's a continuation. And as we've said, we have great visibility into all the components of margins. We're already bought. Harvest and Halloween are on the water. We're starting to -- start to have Christmas flow. But the biggest wildcard is really the promotional cadence that Alex was talking about, and we had a very strong cadence and the right mix, the difference between promotional and regular-priced goods in the first quarter. And if that continues, we'll do even better in margin. But don't get ahead of us because, as we said, we're not focused on the rate. We're more focused on the merchandise margin dollars.

Alexander Smith

And if I can just put that another way, there is -- there's no risk on our input margin. There's no risk on our markdown. The -- as Cary said, the balancing number is what we spend on limited-time offers.

Brian Nagel - Oppenheimer & Co. Inc.

Yes. Then a final question, and I'll turn it over to someone else. But you sound like you're getting more aggressive on TV advertising here in Q2. Again, is that more the same? Or will it be a different type of campaign?

Alexander Smith

The Q2 advertising run is just using what we ran in the first quarter, the 3 ads that we made for that campaign. The radio will be somewhat different because that's obviously easier to produce. But then as we move into fall, there will obviously be new creative for fall and additional new creative for holiday. So a lot of new creative coming through.

Operator

Your next question comes from the line of Budd Bugatch with Raymond James.

Thomas McConville

This is actually TJ, filling in for Budd. I hate to beat a dead horse, but I want to kind of follow up on that -- the margin/sales balance question, maybe a little bit longer term, though. In the prepared remarks, Alex, you talked about, as the economy becomes more robust and promotion gets more -- or less necessary, there's no reason that we can't see further expansion from here. What, if any, impacts do the e-commerce initiatives have? I would think it would be more -- once you -- we launch Pier 1 To-You next year, what are you assuming there as far as a margin impact?

Alexander Smith

Well, my comments, TJ, were relating to the status quo. I mean, I'm talking about our retail margin based on what we know today. I mean, once we start factoring in online sales into it, I mean, it's -- the margin is a completely different equation, obviously. And I think what you're going to find as e-com becomes -- kicks in and becomes a significant part of our business, that we'll probably stop talking to you about merchandise margin and start talking to you about gross profit, so...

Charles Turner

Because, as you know, there are additional costs, including the online, that sort of resemble the -- and reflect the cost of occupancy in stores. So I think the better metric, as we go forward, will be talking about gross profit.

Thomas McConville

Right, right, that was kind of where I was trying to ferret out. That's helpful, guys. And then on the repurchase, the acceleration since the quarter's end, any specific drivers as to why it picked up so significantly after the end of the quarter or, at least, relative to what you did in the first quarter?

Charles Turner

No, I think you're going to see we're just going to be prudent and watch it carefully and make sure we feel we're getting the shares at the best price possible.

Alexander Smith

Yes, we really just want to do a good job for the shareholders and just -- so we're watching for the opportunities.

Thomas McConville

Okay. And then a little mix here for you, Cary, probably it's one I should've asked last quarter. But the deferred revenue line seemed to jump in the fourth quarter. It was relatively flat. What -- why was that up so much? Or why has that been up so much the last 2 quarters?

Charles Turner

Now that's the deal we did with Chase, where we used to have a longer-term contract, and now with the credit card that Chase is processing, the -- and -- next June. And they paid us back $28 million in lieu of paying us fees.

Operator

Your next question comes from the line of Simeon Gutman with Crédit Suisse.

Simeon Gutman - Crédit Suisse AG

Another question on the gross margin line. You mentioned in previous quarters that you were testing or managing or experimenting with the price elasticity in a couple of categories, I guess, a little before -- ahead of potential price increases. Can you talk about that process, whether that also could be benefiting gross margin here, a little bit?

Alexander Smith

I think what you're referring to is where we put retails up when -- to absorb increased cost. Is that what you're thinking about?

Simeon Gutman - Crédit Suisse AG

That's exactly right, yes.

Alexander Smith

Okay, yes, yes. Well, we've -- I mean, again, we -- like all things, we track everything obsessively, and so we know exactly what -- which SKUs have gone up and by how much, and we track the performance of them against their performance prior to a cost increase. And so far, so good. I mean, it's situational. I mean, I -- generally speaking, I would say that if you -- if we put the price of something up, if it's a high ticket to start with, we use -- we lose a little bit of unit velocity but maintain our sales numbers on some of the lower-price items. We don't even always lose the sales velocity, so it's kind of very situational. But as I said in the prepared remarks, I think the buying and planning folks have done a great job at managing these cost increases.

Simeon Gutman - Crédit Suisse AG

Okay. And then and following up on that, breaking down gross margin a little further, how much of the sustainable improvement that you're talking to or that you expect just comes from managing the internal processes better: better systems, just better inventory planning versus some of the -- some sourcing things that are in your control versus, maybe, managing the categories a little differently?

Alexander Smith

Well, I can't break that out for you precisely, because it's a combination of a lot of things and it's not only -- I mean, I didn't actually say it specifically on the call this morning, because I kind of always say it. I mean, a lot of it's to do with just better merchandise hitting the bull's eye more closely. So frankly, that's almost the #1 driver that, if we buy merchandise that the customer wants, then we don't have to mark it down and we sell more. So that's a huge, huge piece of it. But then all the other technical stuff certainly flows into it, the -- our shipping costs and our outgoing distribution costs and all around that.

Charles Turner

And the piece you didn't mention was just managing the overall inventory levels. I mean, if you take a look, inventory levels have stayed flattish over the last 3, 3.5 years.

Alexander Smith

Yes. I mean, I think we have done a really good job at managing inventory. And so -- and that's why I can say with such confidence that there's no -- there is no markdown risk in the business.

Simeon Gutman - Crédit Suisse AG

Right, and I guess that's why even though we're only 17 days in, that 59% for the second quarter. Even if, let's say -- let's just hypothetically say that sales came in lighter, there's still not that much risk to that gross margin line.

Alexander Smith

No, no, none.

Simeon Gutman - Crédit Suisse AG

Okay. And then lastly, on the extra -- the marketing spend. I may have missed the exact explanation, but what did -- what are you seeing or what did you see that are sort of prompting the heightened spend? I mean, because comps seem like they're strong. It seems like you're building all 3, the traffic-ticket conversion, at the same pace. So what else are you going after? Just a higher rate of sales, going forward?

Alexander Smith

Yes, and I think it's a little bit -- if you -- you followed the story over the last few years, I mean, when we've we talked about marketing, we've always talked about pushing on an open door. So we kept our marketing costs really, really tight as we were sort of going through the turnaround and through the recession, because we didn't believe that putting incremental marketing dollars would give us anything, as we move from playing defense to playing offense. And we feel that incremental marketing spend, done judiciously -- we can't go mad at this -- is going to flow through into higher traffic to the stores. So we just feel that we're on a little bit of a roll with this, this summer, and the response to the spring advertising campaign has been good. So we thought, "Okay, well let's just kind of see if we can squeeze a little more juice out of it and run it another few weeks." So that's what we'd do. I mean, in truth, it's not totally scientific. I mean, it's a judgment call. It's how we feel about the business, but we feel it's worth spending that extra money.

Simeon Gutman - Crédit Suisse AG

That's helpful.

Operator

Your next question comes from the line of Brad Thomas with KeyBanc Capital.

Bradley Thomas - KeyBanc Capital Markets Inc.

I wanted to follow up on some of the comments that, Alex, that you made on Pier 1 To-Go. I think it sounds like some very encouraging initial results since its soft launch. What else are you seeing in terms of who that customer is? Can you tell if it's someone new or existing? Was it someone who was already a very frequent customer? And then when you look at the investments that you've made in the site and its functionality, how much do you think that, that's helping comps?

Alexander Smith

That's a lot of questions. I can't really, at this stage, give you any definitive information about whether the Pier 1 To-Go customer varies dramatically from a regular customer. I suspect not. I suspect it's the same audience. But as we build our data, I can certainly give you more info on that.

Charles Turner

Especially the fact that we haven't started advertising, we'd think it's our existing customer.

Alexander Smith

Yes, yes, so but we'll -- more to come on that. In terms of the improvements to the existing website, oh yes, no, absolutely, that has helped. I mean, the visits to our website are up very, very substantially over last year. I mean, we are really pleased with the number of visits and the amount of time and the number of pages that are being -- that customers are going through just tells you that they're absolutely doing that. And anecdotally, I -- when you visit stores and talk to the store associates, they will always tell you customers are always coming in, waving a screen print of something they've seen and that they want to buy. So no doubt, it's helping.

Bradley Thomas - KeyBanc Capital Markets Inc.

And then, with respect to the investments in fixtures, I mean, I think they look great. The stores that have them really look very good. What's -- are you able to quantify the lift that you get from the fixtures and how much of a tailwind you think this year could have just from that investment? Or is it difficult to quantify? Or are you un -- are you willing quantify the SKUs?

Alexander Smith

Well, I mean, we do quantify it. As I said earlier, we analyze everything, but I don't want to give you specifics. What -- I think, when you think about our business, you should think about it a little more holistically than just one thing, because I think the improvements in the business, it's -- some of it's the website, some of it's the new fixtures, some of it's the merchandise, some of it's the improvements to in-store service, some of it's the marketing. And what we're trying to do is to make sure that all these things push in the right direction to keeping our business on track and sustainable. So it's really more everything added together that's driving our business, rather than any one individual thing.

Bradley Thomas - KeyBanc Capital Markets Inc.

And then just lastly, it was an unusual quarter from a weather perspective. Was there anything that you noticed in your business in terms of a weather impact or anything that you would call out geographically during the quarter?

Alexander Smith

Well, we vow never to blame the weather if business is bad when we're talking to you guys. We vow never to ignore it when it's good. So the weather's the weather. There's always the weather. Weather, Easter...

Bradley Thomas - KeyBanc Capital Markets Inc.

And from a regional perspective, how does the quarter play out? Would you call out anything geographically in terms of areas of strength or weakness?

Charles Turner

No. I think, when we announced sales for the quarter, I've mentioned that we were probably happy this year with how cool spring was, that Easter was so late. Having said that, we're very happy that Easter is earlier in the season next year. So we go from here.

Operator

Your next question comes from the line of Alan Rifkin with Barclays Capital.

Alan Rifkin

So we too, I think, will ask our obligatory question on merchandise margins, but maybe just put it in a different context. Alex, when you laid out your 3-year plan for EBIT margins hitting 10%, it certainly looks like it's not unreasonable to believe that you may even hit that number this year. As part of that goal to hit EBIT of 10%, was an assumption behind that, that merchandise margins would only peak out at 60%? So if that is in case true, is it reasonable to expect that merchandise margins now can hopefully be even north of 60% in the out year? Is there the potential for your corporate EBIT margin to even be greater than the 10% that you laid out?

Alexander Smith

Alan, I can put my hands on my heart and promise you we have no plan where merchandise margin begins with a "6." We -- that would -- we think that would be a real stretch. So the 10% that we're referring to, we really get to that through sales and leverage of the costs. But of course, any incremental points on our merchandise margin will certainly flow through. But no, I don't -- within the 3-year plan, we're certainly not for them [ph] passing 60%.

Alan Rifkin

Alex, if you don't mind, if I could just follow up, why is 60% the magic number in terms of the ceiling on merchandise margins?

Alexander Smith

It's a psychological hurdle, no more and no less.

Alan Rifkin

Okay...

Charles Turner

Remember, both exist still in merchandise margin dollars. And we're still only in -- at $171 a square foot. We need to get to $200.

Alexander Smith

So, yes. But you're right about -- I mean, Alan, to answer your question logically, there's nothing that kicks in or stops or starts at 60%. It's just all in our heads.

Alan Rifkin

Okay. I mean, am I correct in assuming that -- typically in the back half of the year, aren't your merchandise margins higher than what you typically post in Q1?

Charles Turner

Third quarter is definitely [ph] higher. The fourth quarter is slightly lower.

Alan Rifkin

Okay. And then just one more, if I may. Cary, any sort of quantification with respect to how much above the corporate average the stores that have the new fixtures are realizing, from a comp perspective?

Charles Turner

We are getting a very good rate of return, and we're not going to give you the number.

Operator

Your last question comes from the line of Anthony Chukumba with BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

Just wanted to get a little bit of color on -- and I know it's obviously very early with Pier 1 To-Go, but you mentioned that the average ticket is higher than the company average. I was just wondering, I mean, you can say sort of directionally, are we talking about significantly higher than your company average? Are we talking about multiples on company average? Or, I guess, just any kind of color would be helpful.

Alexander Smith

It is very early days, and I don't want to get -- be a hostage to fortune on this. It is higher so far, and let me just triple-underline that "so far," because the -- it's really because of the mix, and we are selling relatively more furniture than non-furniture. So that is what's driving the average ticket up.

Charles Turner

And, Anthony, if you think about it, that sort of makes sense because customers are going to shop and pre-shop a little bit more for furniture than lower-ticket items.

Alexander Smith

But when I say higher, I mean, I'm not talking about $0.20 here. I mean, it is measurably and demonstrably higher.

Anthony Chukumba - BB&T Capital Markets

Got it, okay. And then just one final question. You mentioned that people who are coming to the stores to pick up orders are adding another -- are adding additional items to their basket, which is obviously very encouraging. And I would expect -- I mean, is that leading to a significant increase in terms of that basket? In other words, are they picking up one item? Are they picking up several items? I mean, just any kind of color. And obviously, once again understanding it's very early.

Alexander Smith

Yes, I think it's too early, really, to sort of give you any hard data on that. But as this thing plays out, I'm certainly happy to share that with you. But I don't want to mislead, so I'd really rather not say anything more on that at the moment.

Anthony Chukumba - BB&T Capital Markets

Okay. I mean -- I guess, just one last question, somewhat related. I mean, you mentioned a lot of the items that people are buying online and picking up at the store are furniture. Is it safe to assume that they're coming in and picking up additional items, that they're usually -- they're lower-ticket items that they're picking up when they're coming into the store and maybe not furniture?

Alexander Smith

Yes. I mean, I think you can just imagine the scenario. Somebody comes into the store, the store associates are getting the customer's purchase ready, and the customer says, "Oh, I'll just have a little look around whilst I'm here." And they kind of throw a few little bits and pieces into the basket. That's kind of how it's working.

Anthony Chukumba - BB&T Capital Markets

Got it. Okay. Okay, that's helpful.

Alexander Smith

Okay. All right, every -- thank you for joining us today. We'll talk to you next quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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